The SEC held an open meeting on May 9th to discuss whether to propose long-awaited modifications to filer definitions applicable to accelerated filers and large accelerated filers. The proposed modifications dovetail with the SEC’s changes to the smaller reporting company (SRC) standard (adopted in September 2018), as discussed here, but would also impact the requirement under Section 404(b) of the Sarbanes-Oxley Act for certain issuers to provide an auditor’s attestation of management’s assessment of internal control over financial reporting.
In particular, the proposed amendments would:
-
Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available.
-
Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million.
-
Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.
While the proposed definitional changes are, in the Commission’s view, intended to comport with the widely-supported aim of “promot[ing] capital formation for smaller reporting issuers by more appropriately tailoring the types of issuers that are included in the categories of accelerated and large accelerated filers,” the associated SOX 404(b) requirements seem likely to be the key gating issue on the path to the Commissions’ adoption of final rules.
The Commissioners are well known to hold disparate views on the applicability of SOX 404(b) requirements and have previously expressed those views in public statements. And those views were reflected in their respective votes on whether or not to propose the amended rules.
The proposed rules were drafted by the staff at the direction of SEC Chair Jay Clayton who has previously noted noted his view that SOX 404(b) thresholds impact capital formation. Unsurprisingly, Chair Clayton expressed support for the proposal consistent with his prior views. In his statement at the open meeting, Chair Clayton highlighted the “proposed rules are aimed at that subset of issuers where the added step of an ICFR auditor attestation is likely to add significant costs and is unlikely to enhance financial reporting or investor protection” and noted that “[t]he proposed amendments are intended to reduce costs without harming investors for certain smaller public companies and, importantly, encourage more companies to enter our public markets.”
Commissioner Hester Peirce’s views on the applicability of SOX 404(b) seem to align with Chair Clayton and she also supported the staff’s proposed rules. Her previous public statements on the SEC’s rules expanding the SRC threshold, suggested impatience with the lack of SOX 404(b) relief in the final formulation of those rules.
The newest Commissioner, Elad Roisman, expressed interest in further investigation of the economic impact of the amendments but also voted to release the proposed rules for public comment.
Commissioner Robert Jackson was the sole dissenter among the Commissioners and voted against proposing the amendments. Commissioner Jackson has previously stated his opposition to the expanded availability of exemptions to SOX 404(b). In his public statement opposing the newly proposed changes, Commissioner Jackson noted that he relied on his own analysis of “marketplace data” (in lieu of the staff’s) to reach the conclusion that the proposal “has no apparent basis in evidence.” Commissioner Jackson also noted his view that while the proposal would provide the most relief for smaller companies, it is also “equally possible that these are the firms—high-growth companies where the risk, and consequences, of fraud are greatest—where the benefits of the auditor’s presence are highest.”
The future of the newly proposed SOX 404(b) rules seems likely to hinge upon a similar debate among the Commissioners.
The text of the proposed rule is available here.
